Not #BTDB Today: SP500 Levels, Refreshed

Takeaway: I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.

This note was originally published January 23, 2014 at 11:45 in Macro



The 3 main issues for the US stock market in our model are as follows:

  1. US consumption #GrowthSlowing (rate of change vs Q313’s sequential top)
  2. US stocks are down YTD (consensus chases performance)
  3. SPY just broke one of my immediate-term TRADE lines of momentum support (1837)

So, I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.


Across our core risk management durations here are the lines that matter to me most:

  1. Immediate-term TRADE resistance = 1848
  2. Immediate-term TRADE support = 1821
  3. Intermediate-term TREND support = 1779

In other words, for the 1st time in months the SP500 is signaling A) lower-highs vs the all-time closing high and B) a very immediate-term TRADE momentum line breakdown with C) fundamentals (#GrowthSlowing) hanging out in the background.


Sure, there are plenty of reasons to buyem. Flows in particular are tantalizing. But a stock market that goes down on Down Dollar and Down Rates (today), is a stock market that is worried about something I haven’t had to worry about for a year now = #GrowthSlowing.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Not #BTDB Today: SP500 Levels, Refreshed - km1


What's New Today in Retail (1/24)

Takeaway: SBUX’ Schultz echoes our view that we just saw watershed moment for RL redeems itself. China takes aim at WMT. HD deal. JWN, Neiman



Last night Howard Schultz echoed our recent comments that this past holiday would prove to be a watershed moment for e-commerce:

"Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers researched, compared prices and then bought the brand and items they wanted online, frequently using a mobile device to do so. This was also the first holiday in which consumers embraced the convenience and flexibility afforded by physical and digital gift cards with a passion. Instead of gifting a particular item, many consumers instead chose to give the gift of choice."


From Our Note on January 9th: Takeaway: With all the companies putting up disappointing sales, we wanted to throw out a factor that we think is critical. Yes, weather was terrible as the month closed out (and got worse in January). But one thing we'll keep in mind is our view that this holiday will go down as a watershed year for the shift from bricks and mortar to The chart below shows that over the past 10 years there has been a steady increase in e-commerce's share of total spending, but we think that when this quarter's numbers are reported, it will show the greatest increase in the slope in the history of the internet. Our belief is that shopping is behavioral, and an increase in will only feed upon itself and continue to gain share in 2014. 


What's New Today in Retail (1/24) - chart5 1 9




RL - First look: Team USA Olympic opening ceremony uniforms



"Team USA's opening ceremony uniforms for the Sochi Olympics are a patchwork of American iconography — of oversized stars and stripes and multicolored rings and names and numbers."

"They're also a patchwork of American craftsmanship — of wool carted from Oregon, spun in Pennsylvania and North Carolina, and knit in California."


What's New Today in Retail (1/24) - chart1 1 24


Takeaway: No surprise that RL is making a big deal about these uniforms being 'a patchwork of American craftmanship'. It's still reeling from the PR headache of putting uniforms on athletes in 2012 that were made in China. You may or may not like the uniforms below, but there's no mistaking what country they represent.


HD - The Home Depot Acquires



"The Home announced that it has acquired  Based in Houston, is the #1 online window coverings retailer in the world.  The acquisition closed today, and terms of the deal were not disclosed."


Takeaway: This makes sense for The Depot, as it's been trying to build out more on the home furnishings side as opposed to the home renovation side.  But we're surprised to see HD deploy capital in online blinds. There are a lot of categories that lend themselves perfectly to the online marketplace. But we don't think blinds is one of them. We're not saying it's a bad deal. But for a company that so rarely acquires other businesses, we're just a little surprised about this one.


NM - Neiman Marcus Says 1.1 Million Cards Affected by Data Breach



  • "Neiman Marcus Group Ltd., the luxury retailer, said about 1.1 million credit cards may have been compromised in a data breach that occurred last year."


Takeaway: At least it's not 40 million.  Our sense is that the average Neiman customer is still shopping there come hell or high water -- even with a data breach. On the other hand, Target customers will much more easily shift to other alternatives -- because there are alternatives. Not quite the case with Neiman.


WMT - Wal-Mart Assures Product Safety in China



  • "Wal-Mart Stores Inc. has responded to a critical report on Chinese state-run television this week, assuring that it does not cut corners in safety checking or approving products for sale at its 400-plus stores in China."
  • "The company released a detailed statement on Friday in response to a story that appeared on state broadcaster CCTV Thursday evening accusing Wal-Mart of circumventing China’s retail product permit procedures for profit. The report said Wal-Mart had violated proper procedures in instances of more than 600 products that went to its shelves."


Takeaway: Wal-Mart is doing everything in can here. But the reality is that when a Chinese State-run TV station sets its sights on you, even the best PR response is probably not enough.


JWN - Sarah Jessica Parker Teams With Nordstrom



  • "To promote her new shoe line, SJP, Sarah Jessica Parker is teaming up with Nordstrom for a series of pop-up shops at select stores nationwide. The multicity tour kicks off Feb. 28, coinciding with the line’s official launch date."
  • "Through March 2, Parker will be on hand at Nordstrom’s Treasure & Bond location in SoHo to sell shoes, greet fans and sign the product. Following her New York stint, Parker will be making personal appearances from March 5 to 9 at Nordstrom locations in Seattle, Los Angeles, Chicago, Miami and Dallas, respectively."


Takeaway: Sex and the City has been off the air for a decade now…we must have missed the memo that Sarah Jessica Parker is still relevant.


Patagonia - Patagonia Names Rose Marcario CEO



  • "Patagonia on Thursday appointed Rose Marcario, chief executive officer of Patagonia Works, the parent company of Patagonia, Inc., to the dual post of president and ceo of Patagonia. Prior to serving as the ceo of Patagonia Works, Marcario served as Patagonia’s chief operating officer and chief financial officer. Casey Sheahan will step down as ceo of Patagonia, Inc., effective Feb. 7, in order to spend more time with his family in Colorado."


LS&CO - Craig Nomura to Head Retail at Levi's



  • "Craig Nomura has been appointed president of global retail at Levi Strauss & Co., effective Feb. 3."
  • "Nomura, most recently senior vice president of global development at Williams-Sonoma Inc., will also serve as executive vice president of the San Francisco-based jeans and sportswear firm and report to Chip Bergh, president and chief executive officer."
  • "He succeeds Joelle Maher, who left Levi’s in June to join Gymboree Corp. as chief operating officer."




SAP to develop single vertical solution for fashion sector



  • "SAP AG announces plans to collaborate with key customers to better meet the challenges faced by apparel, footwear and accessory companies. Working with adidas, Luxottica and Tommy Hilfiger, SAP envisions bringing a new fashion solution to the marketplace that will better enable fashion brands to manufacture their products and sell them to retailers and consumers using one single, vertical solution."







While we didn't expect such a big FQ1 miss, we correctly predicted the September and December downturn in regional gaming revs.  There is more contributing to IGT's woes, however. 

"I don't know anyone who wasn't surprised by the December results..." – John Vandemore, IGT CFO


Sorry, John but Hedgeye predicted both the September and December downturns within 1% of actual YoY growth.  Check our research on  It was simply the math in our model.  The chart below shows our monthly projections for 2013 along with the actual YoY growth.


IGT punted FQ1 and gave qualitative guidance that looks even worse than the low end of their previous 2014 range.  Management blames sickly regional gaming revenue and its impact on IGT’s yields but the problems are deeper.  Yes, the casinos are facing declining demand from slot players but IGT is losing share in gaming operations, ASP’s are under pressure, and 20% annual declines in North American slot demand over the next two years will be tough to overcome.


We turned negative on IGT in our 10/10/13 Black Book “SLOThy GROWTH” (we also attached a video link below).  In fairness, we did not expect a 5c miss in Q1 despite getting the December GGR analysis right.  IGT usually can pull a few levers to make the quarter, although for the 2nd quarter in a row, they couldn’t.  IGT’s full year FY2014 guidance always looked high and management finally confirmed that.


So where does IGT go from here?  With the stock clearly underperforming in Q4 and in January – IGT is indicating down another 10% pre-market – it looks pretty washed out.  Even with the bad weather, our model is actually projecting a rebound in regional GGR in January – still down low single digits but an improvement over December’s -10%.  Is that a reason enough to buy the stock?  No, but the next negative catalyst may be a few months off.


While IGT faces 2 years of negative headwinds, we’ve often thought the company should be private and that possibility remains.  Strong free cash flow, a low valuation, strong balance sheet, and limited capex needs still hold.  Remember that private equity was interested in WMS and one firm actually made it to the final round of the bidding process.  IGT’s size is more suitable for private equity and unlike WMS, generates a lot of free cash flow. 


With all that said, the risk/reward looks about equal after the open today.




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Get the Macro Right!

Client Talking Points


Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. This has implications for investors around the globe. Country/sector/asset picking matters in a lower variance, divergent performance environment.  Some big YTD divergence and the YTD is only a few weeks old.


We expect a continuation of fund flows out of fixed income and into equities during Q1. The “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering. According to the latest ICI Fund Flow Survey, Equity flows perked up strongly after a negative week to start '14 with the biggest inflow in 10 weeks. This strong weekly inflow coupled with the slight outflow from last week has now moved the 2014 weekly average to a $3.9 billion average inflow for equities to start 2014, a follow through on 2013's positive trends where $3.0 billion per week on average flowed into stock funds.


Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. The reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.

Three for the Road


Markets aren't about calling tops and bottoms - they are all about risk managing ranges @KeithMcCullough


"It's not that I'm so smart, it's just that I stay with problems longer."

-Albert Einstein


Treasury prices surged Friday in their second day of strong gains. The 10-year note was down 5 basis points at 2.722%, on track for its lowest close since the end of November.






A jump in room rates in four-star and five-star hotels over the Lunar New Year holidays is due in part to block bookings by VIP gaming promoters. Sources expected rates over the peak period to be at least double what they were usually.  The president of the Macau Travel Industry Council, Andy Wu Keng Kuong, said four-star and five-star hotel rooms were “almost fully booked” for the Lunar New Year holidays, which begin on January 31. “The third to the sixth days of the Chinese New Year holidays are usually the period with the heaviest bookings,” Mr Wu said. “The nightly rates for four-star and five-star hotels in this period range from 3,000 patacas [US$375] to 7,000 patacas,” he said.



A survey by China’s tourism academy shows, among the city dwellers who bought vacation packages for the Chinese New Year, 40% are travelling abroad, 30% are going somewhere within the Chinese mainland, and the rest are travelling to Hong Kong, Macau, or Taiwan, CCTV reports.  China’s Tourism Academy predicts that tourists during Spring Festival this year will number up to 225 million. Yu Zirong, Deputy General Manager of China Int’l Travel Service, Shanxi, said.  Yu Zirong also said the volume of individual and small group travel during Spring Festival has risen by about 30% over last year.



The drive for Macau’s satellite casino operators to acquire interests in VIP junket operations appears to be gathering pace.  China Star Entertainment Group Ltd says in a Hong Kong filing it’s in talks to acquire a company entitled to profits from VIP gaming in the city.  China Star is controlling entity for Hotel Lan Kwai Fong in downtown Macau, a property under a casino licence from SJM.  The significance of the moves is that they could potentially mean defacto casino operators making commercial decisions about VIP credit issuance or at least having a direct commercial interest in policy on such credit issuance – even if the junket room is not on their own premises.


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